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"I'd aspired to give people a profound education--to teach them something substantial,"

And yet, all of these efforts have been hampered by the same basic problem: Very few people seem to finish courses when they're not sitting in a lecture hall.

"Sebastian is like the smartest guy you've ever met, but on speed,"

His trip in March of 2011 to the TED Conference in Long Beach, California, where he delivered a talk about his work, led to an unexpected change in his plans. Thrun movingly recounted how a high school friend had been killed in a car accident, the result of the kind of human error that self-driving cars would eliminate. Although he was well received, Thrun was upstaged by a young former hedge-fund analyst named Sal Khan, who spoke of using cheaply produced, wildly popular web videos to tutor millions of high school students on the Internet. Thrun's competitive streak kicked in. "I was a fully tenured Stanford professor . . . and here's this guy who teaches millions," he would later recount. "It was embarrassing." Though Thrun insists the timing was coincidental, just a few weeks later, he informed Stanford that he would be giving up tenure and joining Google full time as a VP. (He did continue teaching and is still a faculty member.)

"I can't teach at Stanford again," he said definitively. "I feel like there's a red pill and a blue pill. And you can take the blue pill and go back to your classroom and lecture your students. But I've taken the red pill. I've seen Wonderland."

It's hard to imagine a story that more thoroughly flatters the current sensibilities of Silicon Valley than the one into which Thrun stumbled. Not only is reinventing the university a worthy goal--tuition prices at both public and private colleges have soared in recent years, and the debt burden borne by American students is more than $1 trillion--but it's hard to imagine an industry more ripe for disruption than one in which the professionals literally still don medieval robes. "Education hasn't changed for 1,000 years," says Peter Levine, a partner with Andreessen Horowitz and a Udacity board member, summing up the Valley's conventional wisdom on the topic. "Udacity just seemed like a fundamentally new way to change how communities of people are educated."

Learning, after all, is about more than some concrete set of vocational skills. It is about thinking critically and asking questions, about finding ways to see the world from different points of view rather than one's own. These, I point out, are not skills easily acquired by YouTube video. Thrun seems to enjoy this objection. He tells me he wasn't arguing that Udacity's current courses would replace a traditional education--only that it would augment it. "We're not doing anything as rich and powerful as what a traditional liberal-arts education would offer you," he says. He adds that the university system will most likely evolve to shorter-form courses that focus more on professional development. "The medium will change," he says.

"The sort of simplistic suggestion that MOOCs are going to disrupt the entire education system is very premature," he says.

"We were on the front pages of newspapers and magazines, and at the same time, I was realizing, we don't educate people as others wished, or as I wished. We have a lousy product," Thrun tells me. "It was a painful moment." Turns out he doesn't even like the term MOOC.

"From a pedagogical perspective, it was the best I could have done," he says. "It was a good class." Only it wasn't: For all of his efforts, Statistics 101 students were not any more engaged than any of Udacity's other students. "Nothing we had done had changed the drop-off curve," Thrun acknowledges.

At a press conference the following January, Brown and Thrun announced that Udacity would open enrollment in three subjects--remedial math, college algebra, and elementary statistics--and they would count toward credit at San Jose State University, a 30,000-student public college. Courses were offered for just $150 each, and students were drawn from a lower-income high school and the underperforming ranks of SJSU's student body. "A lot of these failures are avoidable," Thrun said at the press conference. "I would love to set these students up for success, not for failure."

Viewed within this frame, the results were disastrous. Among those pupils who took remedial math during the pilot program, just 25% passed. And when the online class was compared with the in-person variety, the numbers were even more discouraging. A student taking college algebra in person was 52% more likely to pass than one taking a Udacity class, making the $150 price tag--roughly one-third the normal in-state tuition--seem like something less than a bargain. The one bright spot: Completion rates shot through the roof; 86% of students made it all the way through the classes, better than eight times Udacity's old rate.

"These were students from difficult neighborhoods, without good access to computers, and with all kinds of challenges in their lives," he says. "It's a group for which this medium is not a good fit."

Udacity won't disclose how much it is making, but Levine of Andreessen Horowitz says he's pleased. "The attitude from the beginning, about how we'd make money, was, 'We'll figure it out,'" he says. "Well, we figured it out." Thrun, ever a master of academic branding, terms this sponsored-course model the Open Education Alliance and says it is both the future of Udacity and, more generally, college education. "At the end of the day, the true value proposition of education is employment," Thrun says, sounding more CEO than professor. "If you focus on the single question of who knows best what students need in the workforce, it's the people already in the workforce. Why not give industry a voice?"

Thrun initially approached the problem of low completion rates as one that he could solve single-handedly. "I was looking at the data, and I decided I would make a really good class," he recalls.

This January, several hundred computer science students around the world will begin taking classes for an online master's degree program being jointly offered by Udacity and the Georgia Institute of Technology. Fees will be substantial--$6,600 for the equivalent of a three-semester course of study--but still less than one-third of what an in-state student would pay at Georgia Tech, and one-seventh of the tuition charged to an out-of-state one.

Georgia Tech professors will teach the courses and handle admissions and accreditation, and students will get a Georgia Tech diploma when they're done, but Udacity will host the course material. Thrun expects the partnership to generate $1.3 million by the end of its first year. The sum will be divided 60-40 between the university and Udacity, respectively, giving the startup its single largest revenue source to date.

Crucially, the program won't ultimately cost either Udacity or Georgia Tech anything. Expenses are being covered by AT&T, which put up $2 million in seed capital in the hope of getting access to a new pool of well-trained engineers.

"There's a recruiting angle for us, but there's also a training angle," says Scott Smith, an SVP of human resources at the telco. Though Smith says the grant to Georgia Tech came with no strings attached, AT&T plans to send a large group of its employees through the program and is in talks with Udacity to sponsor additional courses as well. "That's the great thing about this model," Smith says. "Sebastian is reaching out to us and saying, 'Help us build this--and, oh, by the way, the payoff is you get instruction for your employees.'" Says Zachary, "The Georgia Tech deal isn't really a Georgia Tech deal. It's an AT&T deal."

“There was still an audience that we were missing, and that was working adults,” Box says. The problem was one of scheduling, because many “could not commit to a traditional semester.”

Under Learn on Demand, students can enroll whenever they want. There are no class schedules or assignment deadlines in the self-paced courses. And students can leave without facing problems when they re-enroll. As Box says, with modular courses, students have “exit points along the way.”

Each module is worth a half-credit, and the course is pay-as-you go, like other modular classes. Tuition is a flat $140 per credit. So in the management course, that’s $67.50 per module. With additional fees, such as charges for e-texts, the course’s modules range from $88 to $105, which is fairly standard across the program. So students can expect to drop no more than a c-note per credit.

Faculty members at Kentucky’s two-year colleges studied the Western Governors model when they were building their new online program, officials said. They also took a long look at the University of Phoenix, mostly to try to duplicate how the for-profit runs its online programs all day, every day, with instructors and student services always on-call. Rio Salado College, an online two-year institution that is part of Arizona's Maricopa Community College System, also served as an example.